Washington Department of Ecology shares more on financial requirement rule for oil industry entities

Since the 1990s, Washington has considered a financial responsibility requirement for class 1 facilities such as oil refineries, marine terminals and pipelines, as proof of being able to pay for the cost of damages of a potential spill. In December 2021, the issue was re-introduced to the Washington House of Representatives with House Bill 1691, passed in the House and the Senate by the spring of 2022, and will require Certificates of Financial Responsibility for class 1 facilities.

Since then, the Department of Ecology (DOE) has been working under the statutes and guidance of the revised code handed to them by the legislature to create an enforceable and implementable rule for the Washington administrative code. The Journal spoke with Matt Bissell, DOE Spills Program Preparedness Section Manager, and Diana Davis, Lead Rule-Writer for the COFR legislation, to learn more about the rule and better understand its elements.

When beginning the initial research, Bissell explained that they started by looking at the West Coast and researching the COFR programs in place in Alaska and California. They found that California has the highest financial requirement amount for class 1 facilities in the country at $12,500 per barrel. Bissell and his team used this metric as their starting point for drafting a $300 million financial requirement in their first iteration of the rule.

“We took the highest highest of the highest [COFR amounts] on the West Coast and went from there as our blueprint and our starting point,” said Bissell. “Throughout the writing process, we engaged a lot with the different stakeholders – that being environmental groups, the impacted industry, and other governmental agencies that are interested in the world of the public.”

During this initial writing process, there were many comments claiming the proposed amount taken from the California financial requirement was too low. The argument follows that California’s $12,500 per barrel requirement is based on a study conducted in 1993 to identify the cost of oil spill damages and response, which is far less than what it would be in today’s dollars. Believing this to be a reasonable point, Bissell and his team brought up the financial requirement to $600 million for the second iteration of the rule, which accurately represented the 1993 study’s cost per barrel in 2023 dollar amounts.

However, during the cost-benefit analysis portion of the rulemaking, economic analysis determined a large gap between what the COFR would be asking for and what was currently available in the insurance market for class 1 facilities, with limitations on oil spill insurance just under $200 million, according to Bissell.

“If we asked for $600 million, we were essentially writing a rule that… a lot of the industry was not going to be able to comply with. We wanted the rule to be effective; we didn’t want to write a rule that wasn’t going to be able to be complied with and then run the risk of it either not being adopted or being postponed. And so through our economic analysis, we did revert back to the $300 million,” said Bissell.

Despite the insurance market setbacks, Bissell stated that the DOE was still proud of their proposed COFR amount, being the highest in the nation. Still, Bissell acknowledged that he and his team do not disagree with those who argue that a worst-case spill could cost more than $300 million, but having a COFR in place does not mean that class 1 facilities are only expected to pay up to the $300 million in damages if an oil spill occurred. Davis explained that class 1 facilities would still be expected to pay for any costs that aren’t covered after the $300 million COFR is applied to the cost of damages.

As put by Davis, a financial responsibility requirement is just a “nest egg of money” that class 1 facilities must provide as proof of having money set aside to pay for an oil spill. Separate from financial responsibility requirements is a limit of liability, which is a capped amount where an entity would not be required to pay anything beyond said amount. According to Davis, limits of liability exist on the federal scale, but Washington does not have a limit of liability in place.

“As an entity spills oil, they are responsible to pay all the costs of cleaning up and up and saving for the damages of that oil spill,” said Davis.

Ty Keltner, Communications Manager for DOE, remarked that he often receives the question of whether there have been situations in the past when the damages of an oil spill weren’t fully covered by the responsible entity and who paid the rest of the bill.

“[Some people] think that somehow the state is on the hook for costs because a spiller cannot pay them, and that is not the case,” said Keltner. “We recover costs from spillers in terms of the damage that’s done to the environment, but we also recover the costs that we put into it too – all the costs for our people to go out and respond to spills, for the time that they put in equipment and everything else – that is also recovered from the responsible party for this bill too. So it’s not something that the people of the state are paying for – we recover those costs from spillers.”

Another point argued by those who are unsatisfied with the $300 million financial requirement for class 1 facilities is the difference between this amount and the $1 billion financial requirement for tank vessels that carry 300 gross tons or more. Bissell explained that vessels have the option of belonging to P&I clubs, or protection and indemnity clubs. These clubs provide mutual maritime insurance for open-ended risks like oil spills, and with a large pool of long-time established contributors worldwide, P&I club members have greater access to protection than class 1 facilities.

At this time, class 1 facilities do not have a P&I club equivalent and must purchase an insurance policy from the market individually. However, Davis mentioned that they will be flexible in accepting different forms of proof of financial responsibility, considering that the current insurance market will not be able to cover the entire $300 million COFR. The DOE will accept surety bonds, a line of credit, certificates of deposit, or a guarantee from a parent company, according to Davis.

“I think the other point that’s important is the risk of a spill to the marine environment or to the environment in general, I would say, is significantly higher for a vessel,” said Bissell. “These vessels are carrying enormous amounts of oil and the locations where they could have an accident… is unknown, and it could be in a place that is very remote and has very limited access for roads and response equipment. When you look at shore-based facilities, they have… a much more controlled environment.”

During the last week of February, the DOE held public hearings for the proposed COFR rule-making, with a written comment period extending to March 8. Keltner mentioned that as part of any rule-making, the point is to gather feedback and engage in a dialogue as opposed to presenting a final product to the public. Those who worked on this rule made sure that collaboration was present from the beginning.

“We started trying to reach out to all of those different stakeholders – the environmental groups, the tribal members, the regulated community and anyone else that wanted to talk to us about this,” said Davis. “We invited over 1300 people to a series of workshops last spring, one after the other and brought up different topics about the coastal rule. One of the things that we had was very active engagement throughout this time period. I’m the type of person who is collaborative – I want to hear what people are thinking and I encourage people to speak up. And they did.”

As for overall feedback, there have been very few, specific changes to the rule’s language besides wanting to change the COFR amount, according to Davis. Davis said the public hearings on Feb. 27 and 28 had many people in attendance who were actively engaged, provided comments, and asked questions to try and understand the many nuances of the rule.

“​​I can’t emphasize enough how much I personally appreciate the feedback and the dialogue that we get from all sides,” said Bissell.

Going forward, the team will take the feedback they have gathered from the public hearings and written comments and have meetings to discuss what can be implemented and what the DOE is authorized to do. Final rule language will be proposed for June adoption and will be effective in July. Once effective, Bissell said that new positions will be created and staff will be hired to audit and evaluate the financial statements submitted by vessels and class 1 facilities, focusing on putting together a strong program to enforce the rule.